Author Archive for Jeff Deist

The Mythical “Wealth Effect”

Seeking Alpha has a nice article debunking the tired “wealth effect” concept. We see this phony phrase trotted out endlessly, but it’s helpful to understand it as combining both Keynesian and Monetarist elements:

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Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending. — Ben Bernanke, 2010

Across all financial media, between both political parties, and among most mainstream economists, the “wealth effect” is noted, promoted, and touted. The refrain is constant and the message seemingly simple: by increasing people wealth through rising stock and housing prices, the populace will increase their consumer spending which will spur economic growth. Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.

The overarching pervasiveness of wealth effect acceptance is not wholly surprising, for it is a perfect blend of the Monetarist and Keynesian Schools.While its exact parentage and origin appears uncertain, its godfather is surely Milton Friedman who published his permanent income theory of consumption in 1957. In bifurcating disposable income into “transitory” and “permanent” income, Friedman argued the latter dictates our spending and consists of our expected income in perpetuity. If consumer spending is generated by expected income, then surely it must also be supported by current wealth?

Happy Birthday Dr. Ron Paul!

Today’s is Ron Paul’s 79th birthday. I’ve had the pleasure of knowing Dr. Paul for several years, and he is one of the most thoroughly decent, thoughtful, and humane men one could ever hope to meet. And by the way, Ron is exceedingly fit and has the energy of a 35 year old. In his case age really is just a number.
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Not everyone knows the extent to which Ron helped Lew Rockwell get the Mises Institute started.  In those early days a fundraising letter from Ron on behalf of the Institute raised critical seed money. And over 30 years Ron has never hesitated to support our mission, speaking at countless functions on our behalf. His 2008 and 2012 presidential campaigns introduced thousands of young people to the works of Mises and Rothbard, reinvigorating interest in the Austrian school. Of course Ron’s initial motivation to run for Congress was his interest in Austrian economics, an interest that became a passion after seeing Mises speak publicly in Houston. Dr. Paul later went on to develop professional relationships with both Murray Rothbard and Hans Sennholz.
Happy birthday, Ron.  And thank you for all that you do.

Econometrics Attacked from the Left

In this interesting article published in Economia (a trade journal for Chartered Accountants), we find a left-progressive argument against math and its overly prominent role in neoclassical economics:

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This discontent was born in the post-autistic economics movement, which started in Paris in 2000, and spread to the United States, Australia, and New Zealand. Its adherents’ main complaint was that the mainstream economics taught to students had become a branch of mathematics, disconnected from reality.

The revolt made little progress in the years of the Great Moderation of the 2000s, but was revived following the 2008 crisis. Two important links with the earlier network are US economist James Galbraith, the son of John Kenneth Galbraith, and British economist Ha-Joon Chang, author of the best-selling 23 Things They Don’t Tell You about Capitalism.

In a manifesto published in April, economics students at the University of Manchester advocated an approach “that begins with economic phenomena and then gives students a toolkit to evaluate how well different perspectives can explain it,” rather than with mathematical models based on unreal assumptions. Significantly, Andrew Haldane, executive director for financial stability at the Bank of England, wrote the introduction.

The Manchester students argue that “the mainstream within the discipline (neoclassical theory) has excluded all dissenting opinion, and the crisis is arguably the ultimate price of this exclusion. Alternative approaches such as post-Keynesian, Marxist, and Austrian economics (as well as many others) have been marginalised. The same can be said of the history of the discipline.” As a result, students have little awareness of neoclassical theory’s limits, much less alternatives to it.

Thinking Makes it So for WaPo

Matt O’Brien at the Washington Post knows that Abenomics can work for the Japanese people, but only if they really, truly believe in it with all their hearts.

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This is not satire:

So what’s going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That’s because the power of the printing press gives their words a distinct power. Well, that and the fact that the economy is already one big self-fulfilling prophecy. See, when people are confident, they spend and invest more, which then justifies their initial optimism—and keeps them spending and investing. The opposite, of course, happens when people are fearful. So, in other words, the economy alternates between virtuous and vicious circles. Central banks try to keep our positive spirals from getting out of control, and our negative spirals from happening at all. And that means convincing us to believe what they want us to.

This is embarrassing and horrifying at the same time, especially coming from a WaPo section called “Wonkblog.” Regime media believe, with religious fervor, that governments and central banks exist to prod us in one direction or another– with a sharp stick if needed. And they are hostile toward (if not literally unaware of) concepts of capital and production.

Stop the “Public Policy” Nonsense

News of this hilarious study by two professors from Princeton and Northwestern is sure to excite the booboisie.  It turns out– gasp– that John Q and Sarah Public have zero influence over government policy. We can only wish Mencken was alive to comment. What’s the next great revelation, your vote doesn’t count?

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Just for the record, there is not supposed to be a “policy” for society, the economy, or you as an individual. We’re supposed to be free.

Our humble advice: Ignore any individual or organization who casually uses the expression “public policy.” It’s a terrible example of statist language, and it necessarily implies the speaker’s acceptance of a host of evil assumptions. Libertarians especially have no business employing the phrase.  Worrying about public policy is like worrying about whether a Mafia hitman uses a garrote or a bullet.

Is Your Checking Account a Deposit Contract?

The blogger Bionic Mosquito has a post relating to today’s Mises Daily article on fractional reserve.  Mosquito makes that point that modern deposit contracts are not bailments, with the depositor retaining ownership. Instead, the individual depositor in effect enters into a short term credit agreement with the bank.

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Of course most depositors certainly do view their bank accounts as a form of bailment.  Hence they say “I’m going to the bank to get my money.”  There is still a widespread view of banks as safe holders of money deposits.  The average Joe doesn’t deposit his paycheck and think, “OK, I just entered into a short term credit arrangement.  I can call the loan at any time though.”

Hans-Hermann Hoppe makes this point in Chapter 6 of The Economics and Ethics of Private Property:

First off, as a matter of historical fact fractional reserve banks never informed their depositors that some or all of their deposits would actually be loaned out and hence could not possibly be ready for redemption at any time. (Even if the bank were to pay interest on deposit accounts, and hence it should have been clear that the bank must loan out deposits, this does not imply that any of the depositors actually understand this fact. Indeed, it is safe to say that few if any do, even among those who are not economic illiterates.) Nor did fractional reserve banks inform their borrowers that some or all of the credit granted to them had been created out of thin air and was subject to being recalled at any time.

Regardless of one’s view of fractional reserve, Hoppe’s observation is correct: banks don’t exactly advertise this fundamental aspect of how they do business.

The real problem is not fraud or fractional reserve banking per se. Eliminate cartelized money (the Fed) and the false security blanket (FDIC) and the market would sort through issues surrounding deposit banks and lending banks.

Politicking Think Tanks vs. the Mises Institute

The execrable Washington Post discusses how DC think tanks have become increasingly activist in the political sense, and (thereby) increasingly self-serving:

Most think tanks were once idea factories. They sponsored research from which policy proposals might flow. In the supply chain of political influence, their studies became the grist for politicians’ programs. But think-tank scholars didn’t lobby or campaign. Politicians and party groups did that. There was an unspoken, if murky, division of labor.

But it’s disappearing, and many think tanks — liberal and conservative — have become more active politically. They are now message merchants, packaging and merchandizing agendas for a broader public.

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Rest assured the Mises Institute will never carry water for any politician, political party, or legislation.  We will never advocate any kind of “public policy.” We will never lobby.  And we will never curry favor with the political class.

Update on Toshio Murata, student of Mises in 1959-60

Toshio Murata was a student of Mises in New York, and translated Human Action into Japanese. He is almost single-handedly responsible for creating an Austrian/Misesian movement in Japan.

Marc Abela of Mises Japan sends us this update, along with some photos of this amazing man recently giving a presentation at age 90:

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Entering his 90s this year, professor Toshio Murata, direct scholarship student to Mises back in 1959-60 in NY, picture taken earlier today, close to Murata-sensei’s home in Nagano prefecture (Japan).

Murata-sensei shared with us the several meetings he would get invited to where Hazlitt would at times show up to proofread Mises’ English, or with Ayn Rand and others (Bettina Greaves, etc) around or showing up in some of the seminars… He was right in New York when Hazlitt was working on renewed editions of his One Lesson (1946) and remembers to this day being handed out freshly printed versions of the new edition on their way to the store (he was probably referring to the 1961′th edition I guess with the added new chapters here and there). Stories go back 50+ years back in time and Professor Murata is turning 91 this year, but all his memories remain quite impeccable it seems.

 

Mises U Starts Tomorrow! Don’t Miss Free Live Streaming of Your Favorite Speakers

Join the Mises Institute as we welcome more than 130 students from all over the world to our Auburn campus! Mises U 2014 is a full week of Austrian scholarship that can’t be found anywhere else on the planet.

Judge Andrew Napolitano, Tom Woods, Walter Block, Bob Murphy, Robert Higgs, Tom DiLorenzo, and many other other scholars are among this week’s faculty.

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Here are just a few highlights:

Tom Woods: Four Things the State is Not.
Walter Block: The Case for Privatization- of Everything.
Judge Andrew Napolitano: The Constitution and the Free Market
Guido Hulsmann: The Cultural Consequences of Fiat Money

The full schedule is here.

Stream the speakers live on YouTube here, or enroll and participate as an online student here.

Steve Forbes Promotes a Gold Standard

Steve Forbes, speaking recently in Las Vegas, continued to advocate a gold standard of sorts–  i.e. pegging the US dollar to gold at (say) $1200 per ounce.  If gold rises to $1300, the Fed decreases the supply of dollars.  It it falls to $1100, the Fed inflates.

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He should be commended (as a representative of mainstream politics and the mainstream financial press) for talking about gold, money, and monetary policy generally.  Plus he makes some very good points about the moral hazards engendered by today’s Fed policy:

“People feel that the link between effort and reward has been eroded,” Forbes said.

Inflation, which is nudging upward in the United States, is a “tax,” Forbes said. He questioned how Fed policies that are causing rising inflation and boosting the cost of living for a typical American by $1,000 a year are helping the economy.

With the current quantitative-easing policies, the Fed will keep its bloated balance sheet, Forbes said. The Fed’s action is taking money out of economy and giving it to a wasteful federal government – hurting small businesses that need to be healthy to create jobs, he added.

“The big banks are now simply hand maidens of the federal government,” Forbes said.

“When we had a gold standard, there was little currency trading,” Forbes said. “Now, volume in currency trading is high.”

Fundamentally, however, Forbes’s plan cannot work for the same reason monopoly political institutions cannot work. No central bank can operate independent of financial and political pressure.  Do we expect Congress to insure the Fed adheres to the proposed gold peg rule?  Will Congress mandate this statutorily?  Will the Fed relax or abandon the rule for wars, depressions, and other government-created calamities?

If Forbes really wants to end crony capitalism, why not simply join Ron Paul and advocate free competition in currency?  Then the grand Fed experiment known as the US Dollar can sink or swim based on the preferences of consumers.

 

Ron Paul Was Dead Right about the Export-Import “Bank”

Just as certain conservatives have attempted to latch on to Ron Paul’s anti-Fed movement (purely for populist political gain), some also recently discovered that the non-bank known as the Export-Import Bank represents (gasp) a form of corporate welfare!

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Who knew that Boeing needed a little help from taxpayers like you to sell those beautiful new 737-800s (and they are beautiful) to EgyptAir, for instance? According to the GAO, the Ex-Im Bank finances or guarantees financing for about 25% of Boeing’s sales of wide-body aircraft.

Here’s Dr. Ron Paul arguing against Export-Import Bank reauthorization back in 2002:

In conclusion, Mr. Chairman, Eximbank distorts the market by allowing government bureaucrats to make economic decisions in place of individual consumers. Eximbank also violates basic principles of morality, by forcing working Americans to subsidize the trade of wealthy companies that could easily afford to subsidize their own trade, as well as subsidizing brutal governments like Red China and the Sudan. Eximbank also violates the limitations on congressional power to take the property of individual citizens and use it to benefit powerful special interests. It is for these reasons that I urge my colleagues to reject H.R. 2871, the Export-Import Bank Reauthorization Act.

Read the entire statement (which is excellent) here.

Grudging Nod to ABCT from The Economist

The Economist is often wrong about economics and world affairs.  Worse still, it is almost uniformly tedious and overbearing in tone: its writers generally sound like exasperated parents having to explain for the hundredth time what everybody knows.

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But here an Economist blogger gets one thing right, in a piece otherwise riddled with errors (everybody knows that Austrians are wrong about QE and hyperinflation, everybody knows that Austrians favor a dystopian, selfish world, etc).

The insight of Austrian economics that seemed pertinent to me is that credit cycles can be hugely destructive, as the credit often does not find its way into productive uses; just drive around Ireland and see the abandoned houses built a decade ago if you want an illustration. Before 2007, most economists seemed to think that credit didn’t matter, except when it caused inflation; that is clearly wrong.

Clearly the central bank apologists are getting nervous, and they should be.  Even the high priestess of the US Fed is warning that “Monetary policy faces significant limitations as a tool to promote financial stability.”

SIR: Perhaps she can push harder on the string.

 

The Giants of Austrian Economics, Multilingual Version!

Click here for the image in 28 glorious languages! Many thanks to Mises Institute Summer Fellow Dante Bayona.

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FedSpeak Translated

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Paul-Martin Foss provides a helpful translation of Janet Yellen’s recent speech before the IMF, for those who don’t understand the (wildly inflated) language known as FedSpeak.

An example:

FedSpeak:

Although it was not recognized at the time, risks to financial stability within the United States escalated to a dangerous level in the mid-2000s. During that period, policymakers–myself included–were aware that homes seemed overvalued by a number of sensible metrics and that home prices might decline, although there was disagreement about how likely such a decline was and how large it might be.

Translation: Nobody remembers what I said back in the mid-2000s and these journalists are too lazy to go back and fact-check my record, so I can get away with saying this. They’re not going to watch Peter Schiff’s video about me, in which he demonstrates within the first ten minutes that I had no clue during the mid-2000s that there was a housing bubble.

Nor will they read the speech I gave in January 2007, stating that “While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—have been largely allayed.”

And they definitely won’t read my speech from February 2007, in which I said that “I believe that a soft landing is the most likely outcome over the next year or two.”

Or the speech from April 2007 in which I said: “While a tightening of credit to the subprime sector and foreclosures on existing properties have the potential to deepen the housing downturn, I do not consider it very likely that such developments will have a big effect on overall U.S. economic performance.”

And I really hope they don’t find my prediction from July 2008, less than three months before everything imploded: “I expect the economy to grow only modestly for the remainder of the year, but to pick up next year. The earlier policy easing by the Federal Reserve will help cushion the economy from some of the effects of the shocks, and the fiscal stimulus program is helping at present. Over time, the drag from housing will wane and credit conditions should improve.”

So Much for Trademarks as Protecting “Property Rights”

Poor billionaire Daniel Snyder, owner of the hapless Washington Redskins, can’t catch a break.  His latest indignity comes courtesy of the US Patent and Trademark office, which administratively cancelled six of his team’s trademarks. Apparently the 1946 Lanham Act forbids the registration of trademarks that disparage a particular group.

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Putting aside any controversy over the team name, this defeat for the less-than-angelic Snyder has nothing to do with property.  Trademarks represent government-granted privileges, not government protection of property rights. So please Mr. Snyder, no whining about “due process.”  Maybe now you’ll start selling jerseys for less than $100!

Steve Forbes Has a New Book on Money

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Steve Forbes was on the Dennis Miller radio show last night promoting his new book about the dollar.  Based on his comments to Mr. Miller, the book proposes something conceptually similar to John Taylor’s “rule-based” Fed, i.e. pegging the US dollar to gold at (say) $1200 per ounce.  If gold rises to $1300, the Fed decreases the supply of dollars.  It it falls to $1100, the Fed inflates.

This Forbes review of the book takes a shot at the Austrian view of “good” money, stressing that money should be understood only as a measure of value for exchange purposes.  But even if one holds that view, it’s hard to get past the distortions central banks cause– rule-based or not.  If the critical role of money is to convey information via prices, is this not an argument for eliminating any chance of misinformation caused by a middleman?

And what of the inherent and insatiable appetite of the political class for monetary inflation to buy votes (while leaving the ravages of debasement for future voters)?  Can a central bank ever truly operate independent of pressure from politicians and politically-connected elites?  Who enforces the new peg, and can it be suspended for “emergencies”? These are questions for Mr. Forbes that our David Gordon surely will address in his upcoming book review.

Mr. Forbes has been reasonably respectful toward Ron Paul, e.g. reviewing (favorably) Dr. Paul’s End the Fed. Forbes should be commended for bringing this issue to the forefront, and for his willingness to criticize the cronyist element of the Fed.  I only wish he (and other conservatives) had been been a little more vocal back when Greenspan was making us all rich, and Dr. Paul was a lonely voice in the wilderness.

 

Forbes Matches Bloomberg for Incoherence on Piketty

Left, right, conservative, progressive- they all get it wrong when it come to Piketty’s  inequality shibboleth (and the proposed “solutions”).

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Exhibit 1 is this drivel from Forbes, complete with light criticism of the reliably awful Peter Orzag.  Orzag (via Bloomberg) pines for a progressive consumption tax, and Forbes is A-OK with that:

There’s much to like in this editorial by Peter Orszag. His two major suggestions for altering the tax system make complete and total sense. Yes, it would be good if we all moved to a progressive consumption tax and it would also be a good idea if we moved to an inheritance rather than an estate tax. There are no complaints from me on either of those scores.

The Forbes article goes on to discuss in detail the niceties of what constitutes a tax on wealth, and what constitutes a tax on consumption.  Since Forbes is “free-market,” it prefers a tax on consumption.  Mr. Orzag’s only sin is that he fails to understand his own proposal properly.

As Ron Paul explained, tax reform is a shell game.  It’s simply a matter of aligning various interests against each other to make sure the other guy pays.

All one needs to know about any tax reform proposal is summarized by the Rockwell Rule:

I really must say this again because it is the most important single point you can remember when evaluating whether to support a tax reform or not: the only trustworthy plan is that one that proposes a lowering or elimination of an existing tax, period. 

Ecuador’s Central Bank Announces Unholy Deal with Goldman Sachs

While gold seems to mostly flow from west to east these days, some of it apparently still flows south to north, according to Bloomberg.  And it flows directly from Ecuador’s central bank into the coffers of Goldman Sachs. Ecuador’s Finance Ministry needs liquidity to cover a projected budget deficit of nearly $5 billion (pikers!) this year, and bond issuances are problematic since a default only 5 years ago.

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Here’s some refreshing candor from central bank president Diego Martinez, via an official statement:

“Gold that was not generating any returns in vaults, causing storage costs, now becomes a productive asset that will generate profits,” the central bank said in the statement. “These interventions in the gold market represent the beginning of a new and permanent strategy of active participation by the bank, through purchases, sales and financial operations, that will contribute to the creation of new financial investment opportunities.”

 

The Biggest Employers in America

Are Fedgov and state universities, according to Business Insider.  The private sector, not the state, is withering away.

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The End of Shopping as Entertainment in America

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In America, Memorial Day weekend (like Labor Day weekend) means big sales at most major US retailers.  But the credit-fueled consumer frenzy of the early 2000s has come to a screeching halt, reports The Market Oracle:

The pundits, politicians and delusional retail CEOs continue to await the revival of retail sales as if reality doesn’t exist. The 1 million retail stores, 109,000 shopping centers, and nearly 15 billion square feet of retail space for an aging, increasingly impoverished, and savings poor populace might be a tad too much and will require a slight downsizing – say 3 or 4 billion square feet. Considering the debt fueled frenzy from 2000 through 2008 added 2.7 billion square feet to our suburban sprawl concrete landscape, a divestiture of that foolish investment will be the floor. If you think there are a lot of SPACE AVAILABLE signs dotting the countryside, you ain’t seen nothing yet. The mega-chains have already halted all expansion. That was the first step. The weaker players like Radio Shack, Sears, Family Dollar, Coldwater Creek, Staples, Barnes & Noble, Blockbuster and dozens of others are already closing stores by the hundreds. Thousands more will follow.

One thing every responsible parent tries to teach children is the difference between need and want.  American consumers may be forced to digest this lesson simply because they’re running out of money and credit.  Shopping may no longer be a weekend diversion, or a form of ersatz therapy.

Of course dead malls have been with us for some time.  But the horrific bust created by the Fed’s unholy and artificial boom will endure for decades to come, in the form of rotting strip malls and ghostly, never-rented office parks.